"The aluminum can in my hand will be back in the refrigerator in 60 days in the form of another aluminum can after I drink its contents and put it into a recycling bin," said Charles McLane, holding a canned drink while conducting an exclusive interview with China Daily.

The words of McLane, executive vice-president and chief financial officer of Alcoa Inc, the world's largest miner of bauxite and refiner of alumina, describe how sparingly the metal has been used in an industry that has attracted huge investment enthusiasm in China, especially in western areas.

Faced with a gloomy global economy, many giant aluminum businesses decided to curtail their production capacity and close down some facilities to deal with shrinking demand in the downstream market and falling prices.

Rio Tinto, the world's third largest miner by market capitalization, started to consider curtailing its electrolytic aluminum businesses in late 2011 to deal with the sector's low profitability and, in some cases, losses.

Alcoa announced early this year that the company will curtail its electrolytic aluminum production capacity of around 531,000 tons and reduce the output of electrolytic aluminum by 12 percent. Meanwhile, the company shut down three smelters in the United States, according to public reports.

While foreign companies in the industry are changing their strategy to survive difficult times in the market, China's aluminum companies are substantially increasing production capacity and annual output.

The Chinese aluminum companies are faced with an extremely oversupplied market and rising energy costs, which has made competition even more fierce during their rapid expansion in West China.

As a senior leader of the biggest foreign investor in the aluminum industry, McLane's comment on Chinese electrolytic aluminum producers' go-west campaign appears right on target.

"If you look at the energy efficiency goals and the carbon emission reduction goals that China's 12th Five-Year Plan (2011-15) has set up and then you look at what is going on in the aluminum industry, I think it shows the aluminum industry has some significant challenges in order to be aligned with the plan's goal," he said.

According to statistics from the China Nonferrous Metals Industry Association, up to 90 percent of the new electrolytic aluminum production capacity has been from western China since the year 2009.

Last year, China's 3.4 million tons of new production capacity of electrolytic aluminum were mainly in the Xinjiang Uygur autonomous region and Qinghai province in Northwest China.

The total investment of new aluminum projects in Xinjiang alone reached 85.4 billion yuan ($13.6 billion), focusing on the smelting businesses. The overall production capacity of electrolytic aluminum including existing, under-construction and planned projects in the region is more than 13 million tons.

Compared with the rapidly increasing production capacity in the west of the country, sites in the east that used to be the main centers of the industry now have problems with rising energy costs and shortages of raw materials.

Some industrial insiders believe electrolytic aluminum producers in eastern China should quit the market even though it may affect the local governments' gross domestic product performances and add to the difficulties of attracting foreign investment. However, it sounds like the only solution to the oversupply situation.

China has had a severe oversupply of electrolytic aluminum on a monthly base for a long time and factory inventories keep increasing.

According to CRU consultancy, an international independent commodities research institute, China's electrolytic aluminum supply reached 1.6 million tons in February with a growth rate of 20 percent year-on-year, but demand was for only 1.3 million tons with just a 4 percent increase compared with the same period last year.

"If there is oversupply every month it will eventually put much pressure on aluminum prices," said Tang Lianghua, an industrial analyst.

According to the Shanghai Futures Exchange, the electrolytic aluminum inventories in the exchange reached 367,689 tons in mid-April, which was a record high since May 2011.

The contradiction between the growing production capacity and reducing rate of demand will result in the bankruptcy of many aluminum producers, said a senior analyst working at the China Nonferrous Metals Industry Association who didn't want to be named.

What's worse is that it seems the go-west campaign will not bring much benefit to the industry in the long run.

"The main reason for companies going to the western provinces is low electricity prices," the analyst said. "It is true that there is a water shortage problem in the western area and transportation will raise costs for the companies, but with the cheap electricity and labor, the electrolytic producers can still make money."

According to data from the association, except in Qinghai and Xinjiang, companies have to pay 0.45 yuan for one kilowatt-hour of electricity, which brings the cost of electrolytic aluminum to 16,400 yuan a ton - higher than the selling price.

In Henan, Sichuan, Yunnan and Guizhou provinces and Guangxi Zhuang autonomous region, the unit power price is more than 0.6 yuan, which raises the price of aluminum up to 18,400 yuan a ton, creating deficits for many companies. However, there are few companies that plan to curtail output.

The analyst said a lot of companies will face bankruptcy if the situation prevails.

"In fact, private companies with strong financial power don't even need subsidies from the government. They have enough capital to invest in new projects," he said. "The overcapacity problem has been in existence for a long time and the government wants to solve it, too. However, only free competition in the market can provide a solution."

McLane shares the same view about a free market solution. He thinks the go-west campaign for the aluminum industry is not sustainable.

"In Europe right now we have partially curtailed some assets. When you are faced with decreasing aluminum prices, you have to look at what assets you are running continuously and how long you can afford to do that," he said.

According to McLane, moving a capacity of 10 million tons of smelting to western China would cost $45 billion for smelting and power.

"In fact, if you look at the amount of investment going on in the west right now, moving out from the east, it would be an investment equal to $450,000 per person for the new employment created," he said. "Many more jobs can be created with that amount of money if it is invested properly."

In China, the energy cost is about 40 percent to 45 percent of the cost to produce primary aluminum, which is about twice as much as it is in other countries, according to public figures.

McLane said about 30 percent of Chinese smelting production was unprofitable in 2011 in the aluminum industry worldwide.

Transition period

Overcapacity and shrinking demand have accelerated the cut-throat competition in the electrolytic aluminum industry.

Xiong Weiping, general manager of Aluminum Corporation of China, the largest primary aluminum producer in the country, said the industry will experience three to five years of downturn but the company could still remain strongly competitive if a whole production chain of coal, electricity and aluminum can be formed.

The Chinese government obviously has made efforts to keep a lid on the problem.

In 2005, the National Development and Reform Commission announced that the government will restrict new production capacity of electrolytic aluminum.

In 2009, the commission said it will not approve any new projects for the production of electrolytic aluminum in the following three years.

In April last year, it, together with other related departments, made a statement saying that the increasing aluminum investment in western China was in disorder and canceled preferential policies. In July, the construction of 23 electrolytic aluminum projects was stopped.

However, it seems nothing can stop the companies' continued enthusiasm to go west. The consequences will eventually emerge in such areas as a high dependence on bauxite imports.

In 2011, China imported 44.85 million tons of bauxite, a 50 percent growth year-on-year. The imports are mainly from Indonesia, Australia and India, among which Indonesia is the biggest supplier, accounting for 80 percent of the total.

The Indonesian government announced recently that the country will stop exporting bauxite from 2014, which will affect China's aluminum production and the stability of the whole industrial production chain.

McLane said the Chinese aluminum industry is going through a transition period in the up-stream business because of this high dependence on raw material imports, as well as rising electricity costs and emissions.

According to data from the China Nonferrous Metal Industry Association, China's dependency on foreign bauxite was 47 percent in 2011. The total output of bauxite in China last year was 34.17 million tons. The country's proved reserve of bauxite could only last another nine years of production based on the current production scale if all the bauxite were supplied domestically.

At present, Chinese companies' bauxite resources abroad are still at the exploration stage and therefore not yet able to guarantee a secure supply.

Alcoa strategy

In such a difficult time for the aluminum industry, Alcoa achieved a good performance in the first quarter this year when most Chinese aluminum companies were losing money.

The company reported income from continuing operations in the first quarter was $94 million, or 9 cents a share, compared with a profit of $309 million, or 27 cents a share, in the same quarter last year. The revenue rose slightly to $6 billion. Before the company released its financial report, analysts were expecting a loss of 4 cents per share and revenue of $5.77 billion, according to Reuters.

McLane said a cash sustainability program that includes cost control and asset management in the upstream businesses of the company, combined with high value-added products and innovation in the midstream and downstream businesses, helped in cutting costs and led to good performance.

However, he said the market started to become very challenging this year.

"We cut costs in the upstream business, which is our strategy, creating growing revenues in the mid-stream and down-stream," he said. "We got hurt as well on the commodity side like many companies that don't have mid-stream or downstream businesses."

In the company's midstream businesses in China, he predicted the beverage can sector will grow the fastest, and products used in automobiles will increase too.

Alcoa doesn't have up-stream businesses in China, which prevents it from being affected by oversupply in the electrolytic aluminum market.

The company declined to release its revenue or profits by region but McLane said he sees aluminum demand growth in China this year of 11 percent. He said that compared with the 15 percent growth in 2011, it is a little bit of a slowdown, but still a pretty significant figure.

"The Chinese government is doing a good job at balancing the real estate, inflation and trade balances, which helps to move the economy along. The related policies will not affect the downstream aluminum businesses in China," he said. "In 2010, we estimated the world aluminum demand is going to double by 2020 and we are still on pace to see that."

The company, which makes aluminum for aircraft, cars and beverage cans, raised its 2012 global growth forecast for the aerospace market by 3 percentage points to 13 to 14 percent and said it expects global growth in the auto industry of 3 to 7 percent.

Alcoa and its Chinese partner, China Power Investment Corporation, one of the five giant power groups in the country, finalized an agreement in February to form a joint venture for producing high-end fabricated aluminum products for the Chinese market.

The new company, named Alcoa CPI (China) Aluminum Investment Co, will be based in Shanghai. Alcoa is expected to hold a major portion of the company's share, according to public reports.

McLane said Alcoa is evaluating with its partner some of the upstream projects outside China. But, for the activities inside China, they will focus on fabricated aluminum for aerospace, commercial transportation, packaging, automotive and consumer electronic industries.

Having seen the growing development of China's aerospace market, Alcoa will bring more products in this sector to the country. Currently it is supplying Commercial Aircraft Corp of China Ltd with both domestic products and imports.

"The aluminum can in my hand will be back in the refrigerator in 60 days in the form of another aluminum can after I drink its contents and put it into a recycling bin," said Charles McLane, holding a canned drink while conducting an exclusive interview with China Daily.

The words of McLane, executive vice-president and chief financial officer of Alcoa Inc, the world's largest miner of bauxite and refiner of alumina, describe how sparingly the metal has been used in an industry that has attracted huge investment enthusiasm in China, especially in western areas.

Faced with a gloomy global economy, many giant aluminum businesses decided to curtail their production capacity and close down some facilities to deal with shrinking demand in the downstream market and falling prices.

Rio Tinto, the world's third largest miner by market capitalization, started to consider curtailing its electrolytic aluminum businesses in late 2011 to deal with the sector's low profitability and, in some cases, losses.

Alcoa announced early this year that the company will curtail its electrolytic aluminum production capacity of around 531,000 tons and reduce the output of electrolytic aluminum by 12 percent. Meanwhile, the company shut down three smelters in the United States, according to public reports.

While foreign companies in the industry are changing their strategy to survive difficult times in the market, China's aluminum companies are substantially increasing production capacity and annual output.

The Chinese aluminum companies are faced with an extremely oversupplied market and rising energy costs, which has made competition even more fierce during their rapid expansion in West China.

As a senior leader of the biggest foreign investor in the aluminum industry, McLane's comment on Chinese electrolytic aluminum producers' go-west campaign appears right on target.

"If you look at the energy efficiency goals and the carbon emission reduction goals that China's 12th Five-Year Plan (2011-15) has set up and then you look at what is going on in the aluminum industry, I think it shows the aluminum industry has some significant challenges in order to be aligned with the plan's goal," he said.

According to statistics from the China Nonferrous Metals Industry Association, up to 90 percent of the new electrolytic aluminum production capacity has been from western China since the year 2009.

Last year, China's 3.4 million tons of new production capacity of electrolytic aluminum were mainly in the Xinjiang Uygur autonomous region and Qinghai province in Northwest China.

The total investment of new aluminum projects in Xinjiang alone reached 85.4 billion yuan ($13.6 billion), focusing on the smelting businesses. The overall production capacity of electrolytic aluminum including existing, under-construction and planned projects in the region is more than 13 million tons.

Compared with the rapidly increasing production capacity in the west of the country, sites in the east that used to be the main centers of the industry now have problems with rising energy costs and shortages of raw materials.

Some industrial insiders believe electrolytic aluminum producers in eastern China should quit the market even though it may affect the local governments' gross domestic product performances and add to the difficulties of attracting foreign investment. However, it sounds like the only solution to the oversupply situation.

China has had a severe oversupply of electrolytic aluminum on a monthly base for a long time and factory inventories keep increasing.

According to CRU consultancy, an international independent commodities research institute, China's electrolytic aluminum supply reached 1.6 million tons in February with a growth rate of 20 percent year-on-year, but demand was for only 1.3 million tons with just a 4 percent increase compared with the same period last year.

"If there is oversupply every month it will eventually put much pressure on aluminum prices," said Tang Lianghua, an industrial analyst.

According to the Shanghai Futures Exchange, the electrolytic aluminum inventories in the exchange reached 367,689 tons in mid-April, which was a record high since May 2011.

The contradiction between the growing production capacity and reducing rate of demand will result in the bankruptcy of many aluminum producers, said a senior analyst working at the China Nonferrous Metals Industry Association who didn't want to be named.

What's worse is that it seems the go-west campaign will not bring much benefit to the industry in the long run.

"The main reason for companies going to the western provinces is low electricity prices," the analyst said. "It is true that there is a water shortage problem in the western area and transportation will raise costs for the companies, but with the cheap electricity and labor, the electrolytic producers can still make money."

According to data from the association, except in Qinghai and Xinjiang, companies have to pay 0.45 yuan for one kilowatt-hour of electricity, which brings the cost of electrolytic aluminum to 16,400 yuan a ton - higher than the selling price.

In Henan, Sichuan, Yunnan and Guizhou provinces and Guangxi Zhuang autonomous region, the unit power price is more than 0.6 yuan, which raises the price of aluminum up to 18,400 yuan a ton, creating deficits for many companies. However, there are few companies that plan to curtail output.

The analyst said a lot of companies will face bankruptcy if the situation prevails.

"In fact, private companies with strong financial power don't even need subsidies from the government. They have enough capital to invest in new projects," he said. "The overcapacity problem has been in existence for a long time and the government wants to solve it, too. However, only free competition in the market can provide a solution."

McLane shares the same view about a free market solution. He thinks the go-west campaign for the aluminum industry is not sustainable.

"In Europe right now we have partially curtailed some assets. When you are faced with decreasing aluminum prices, you have to look at what assets you are running continuously and how long you can afford to do that," he said.

According to McLane, moving a capacity of 10 million tons of smelting to western China would cost $45 billion for smelting and power.

"In fact, if you look at the amount of investment going on in the west right now, moving out from the east, it would be an investment equal to $450,000 per person for the new employment created," he said. "Many more jobs can be created with that amount of money if it is invested properly."

In China, the energy cost is about 40 percent to 45 percent of the cost to produce primary aluminum, which is about twice as much as it is in other countries, according to public figures.

McLane said about 30 percent of Chinese smelting production was unprofitable in 2011 in the aluminum industry worldwide.

Transition period

Overcapacity and shrinking demand have accelerated the cut-throat competition in the electrolytic aluminum industry.

Xiong Weiping, general manager of Aluminum Corporation of China, the largest primary aluminum producer in the country, said the industry will experience three to five years of downturn but the company could still remain strongly competitive if a whole production chain of coal, electricity and aluminum can be formed.

The Chinese government obviously has made efforts to keep a lid on the problem.

In 2005, the National Development and Reform Commission announced that the government will restrict new production capacity of electrolytic aluminum.

In 2009, the commission said it will not approve any new projects for the production of electrolytic aluminum in the following three years.

In April last year, it, together with other related departments, made a statement saying that the increasing aluminum investment in western China was in disorder and canceled preferential policies. In July, the construction of 23 electrolytic aluminum projects was stopped.

However, it seems nothing can stop the companies' continued enthusiasm to go west. The consequences will eventually emerge in such areas as a high dependence on bauxite imports.

In 2011, China imported 44.85 million tons of bauxite, a 50 percent growth year-on-year. The imports are mainly from Indonesia, Australia and India, among which Indonesia is the biggest supplier, accounting for 80 percent of the total.

The Indonesian government announced recently that the country will stop exporting bauxite from 2014, which will affect China's aluminum production and the stability of the whole industrial production chain.

McLane said the Chinese aluminum industry is going through a transition period in the up-stream business because of this high dependence on raw material imports, as well as rising electricity costs and emissions.

According to data from the China Nonferrous Metal Industry Association, China's dependency on foreign bauxite was 47 percent in 2011. The total output of bauxite in China last year was 34.17 million tons. The country's proved reserve of bauxite could only last another nine years of production based on the current production scale if all the bauxite were supplied domestically.

At present, Chinese companies' bauxite resources abroad are still at the exploration stage and therefore not yet able to guarantee a secure supply.

Alcoa strategy

In such a difficult time for the aluminum industry, Alcoa achieved a good performance in the first quarter this year when most Chinese aluminum companies were losing money.

The company reported income from continuing operations in the first quarter was $94 million, or 9 cents a share, compared with a profit of $309 million, or 27 cents a share, in the same quarter last year. The revenue rose slightly to $6 billion. Before the company released its financial report, analysts were expecting a loss of 4 cents per share and revenue of $5.77 billion, according to Reuters.

McLane said a cash sustainability program that includes cost control and asset management in the upstream businesses of the company, combined with high value-added products and innovation in the midstream and downstream businesses, helped in cutting costs and led to good performance.

However, he said the market started to become very challenging this year.

"We cut costs in the upstream business, which is our strategy, creating growing revenues in the mid-stream and down-stream," he said. "We got hurt as well on the commodity side like many companies that don't have mid-stream or downstream businesses."

In the company's midstream businesses in China, he predicted the beverage can sector will grow the fastest, and products used in automobiles will increase too.

Alcoa doesn't have up-stream businesses in China, which prevents it from being affected by oversupply in the electrolytic aluminum market.

The company declined to release its revenue or profits by region but McLane said he sees aluminum demand growth in China this year of 11 percent. He said that compared with the 15 percent growth in 2011, it is a little bit of a slowdown, but still a pretty significant figure.

"The Chinese government is doing a good job at balancing the real estate, inflation and trade balances, which helps to move the economy along. The related policies will not affect the downstream aluminum businesses in China," he said. "In 2010, we estimated the world aluminum demand is going to double by 2020 and we are still on pace to see that."

The company, which makes aluminum for aircraft, cars and beverage cans, raised its 2012 global growth forecast for the aerospace market by 3 percentage points to 13 to 14 percent and said it expects global growth in the auto industry of 3 to 7 percent.

Alcoa and its Chinese partner, China Power Investment Corporation, one of the five giant power groups in the country, finalized an agreement in February to form a joint venture for producing high-end fabricated aluminum products for the Chinese market.

The new company, named Alcoa CPI (China) Aluminum Investment Co, will be based in Shanghai. Alcoa is expected to hold a major portion of the company's share, according to public reports.

McLane said Alcoa is evaluating with its partner some of the upstream projects outside China. But, for the activities inside China, they will focus on fabricated aluminum for aerospace, commercial transportation, packaging, automotive and consumer electronic industries.

Having seen the growing development of China's aerospace market, Alcoa will bring more products in this sector to the country. Currently it is supplying Commercial Aircraft Corp of China Ltd with both domestic products and imports.